Autos Hit 40 Miles of Bad Road

Detroit's sales slump leads the business slowdown

The warm weather and quickened heartbeats of spring have traditionally sparked a resurgence in U.S. auto sales after winter's doldrums. Not this year. Domestic new car sales for the first ten days in April were down a sharp 24% from a year ago. Detroit now expects to build only 7 million cars this year. In the past 18 years, only one year was worse: recession-struck 1975.

Last week Ford Motor Co., which is expected to lose $1 billion on domestic car operations in 1980, announced the permanent closing of its assembly plant in Mahwah, N.J., shut down smaller operations in Dearborn, Mich., and Windsor, Ont, and cut 15,000 blue-and white-collar jobs. Time may be running short for Chrysler. Sales are off 26% from 1979's already depressed levels, and the company is making a herculean cost-cutting and consolidation effort in order to qualify for $1.5 billion in federal guaranteed loans. Even mighty General Motors last week put 12,000 more workers on indefinite layoff.

Auto industry layoffs may soon exceed 250,000, which badly hurts such auto-dependent cities as Detroit, where unemployment has already reached 24%. The current downturn is reminiscent of 1927, when Henry Ford helped push the country's economy into a slump by halting all Ford output for five months, as he switched production from the Model T to the Model A. Says United Auto Workers President Douglas Fraser: "The rest of America may be having a recession. But autoworkers are having a depression."

The nation's deteriorating economy is not the only source of Motown's blues; American automakers are waging a losing battle against Japanese competition. Imports now account for more than one of every four cars bought in the U.S., and 80% of those are made in Japan. American sales of popular Toyota Corollas since the beginning of the year have been higher than those of all Chrysler's Dodge division. The Japanese cars have won a hard-to-beat reputation for economy and quality of workmanship. In a recent survey of American auto engineers by Ward's Auto World magazine, nearly half said they thought Japanese cars are better built than comparable U.S. models.

Auto company executives have stopped short of lobbying for import restrictions against Japan. Just as well. President Carter at his news conference last week pointed a wagging finger at the industry and said he had urged Detroit automakers to build smaller cars three years ago. He said they had replied that American consumers wanted big ones. The President firmly ruled out restrictions on Japanese imports, saying that controls would force consumers to buy the inefficient gas guzzlers they do not want. Both Carter and industry officials would like the Japanese to construct assembly plants here, and last week Nissan Motor, which makes the Datsun, announced plans for a new $300 million truck plant to be built in either the Great Lakes region or the Southeastern U.S. Honda will begin construction of an auto plant by the end of 1980 next door to its Marysville, Ohio, motorcycle facility.

The Big Three U.S. carmakers are currently caught in a deadly bear pit. Simultaneously, they are trying to sell off a fleet of aging behemoths, fight off the Japanese import offensive and find $30 billion to $40 billion to build the smaller, fuel-efficient cars the public now demands. Until a year ago, Detroit vehemently complained about the difficulty of meeting the Government-mandated Corporate Average Fuel Economy (CAFE) standard of 27.5 miles per gal. by 1985. Now the Big Three automakers have to do even better in order to satisfy consumer desires. Buyers will stand in line or pay top price for a compact car they want, such as the Chevrolet Citation or Volkswagen Rabbit. But few want big cars at any price.

These changes are made more difficult because of the profit structure of the auto industry. Traditionally, the carmakers have made their big profits on big cars. Earnings on a full-size model may be $1,000, as compared with only $200 to $300 on a small car. Thus the companies are now doubly hit.

Auto dealers are bearing the brunt of Detroit's past mistakes. "I'll take what I can get for Lincolns and Mercurys," says Dealer Marty Ladin of Thousand Oaks, Calif. "I've even got a couple of '79s left over." Though most dealerships have kept inventories prudently low, financing costs for cars on hand are astronomical. With their current interest rates at 21%, each automobile in the showroom can cost as much as $150 per month. Privately, GM figures that 850 of its 12,800 dealers could go broke before October. Last week Richard Erb of Erb Chevrolet in Tecumseh, Mich., filed for bankruptcy. Two years ago, he had one of the most profitable dealerships in the state, selling $10 million worth of autos annually. Said Erb:"I don't believe it's because Americans do not build quality cars. They just build too many of the wrong cars."

Chrysler, the sick man of the industry, remains on the critical list. Despite months of frantic scrambling, it has been hard pressed to put together the $2 billion finance package needed to qualify for $1.5 billion in Government-guaranteed loans. Last week it looked as if the firm may have done it. Though Chrysler's bankers did not extend the company the required $400 million new line of credit, they did grant $680 million in loan deferrals and interest-payment concessions. Chrysler agreed to give the lenders the option of buying half its auto subsidiary.

With that accord and the company's latest operating plan in hand, Chairman Lee lacocca flew to Washington at week's end to present his financial package to Treasury Secretary G. William Miller and other members of the Government's Loan Guarantee Board. In a two-hour meeting in the Treasury Building's fourth-floor conference room, lacocca promised to cut $2 billion from an ambitious fiveyear, $13.6 billion spending program by merging the company's three car lines into two and by further layoffs. The board members were noncommittal, but Chrysler must have the money soon. The firm's first-quarter loss is now expected to be close to last year's third-quarter record operating deficit of $461 million.

Like a man waiting for a bad headache to go away, Detroit is stuck with its undesirable cars while looking forward to the new generation of fuel-thrifty cars due to begin arriving on dealer lots this fall. In describing the new Chrysler autos, lacocca says: "We're going to be building three types--small cars, smaller cars and smallest cars." Both Ford and GM will introduce front-wheel drive, so-called world cars, which may be the industry's best prospect for future profits. These will be small, economical vehicles assembled from parts made in several countries. Essentially, the same car will be sold all over the globe. Ford's entry in this field is the subcompact Ford Escort and Mercury Lynx, which replace the outdated Pinto and Bobcat models.

GM remains best placed to withstand the current tempest, and will probably be the only Big Three automaker to earn a profit this year. Its very successful X cars, such as the Chevrolet Citation and the Buick Skylark, are helping the company maintain its market share. This fall GM will introduce shrunken or downsize intermediate cars like the Chevrolet Monte Carlo and Buick Regal. Its J car is due in April 1981, and will be a sporty subcompact successor to such models as the Chevy Monza.

Chrysler's survival hangs on the success of its K car, a front-wheel-drive compact. The auto will be marketed as the Dodge Aries and Plymouth Reliant and looks like a smaller version of this year's Mirada and Cordoba. Its fuel economy and size will position it precisely against GM's hot-selling X cars. Reports TIME Detroit Bureau Chief Barrett Seaman: "If the market stays as dismal as it is and the public fails to take to the new small cars, no amount of federal guaranteed loans will save Chrysler."

Until the new smaller cars from Detroit's Big Three arrive, the American auto picture will remain gloomy. Ford's North American auto chief, Harold ("Red") Poling, says pessimistically: "The outlook is not good. In 1981 there will be some pickup but not a big one, and there is some chance of resurgence in 1982 or '83. I think we are going to be going through a very tough period." With management and assembly-line personnel slashed, the dealer base eroded and consumer loyalty dissipated, it may be another few years before spring blooms again in Detroit. qed

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